Question 1

The Big Mac index is an example of purchasing power parity, an international measure of junk-food consumption.

Accepted Answer

The Big Mac index is indeed an example of purchasing power parity, but it is used to measure the relative value of currencies, not junk-food consumption.

Question 2

Sir Isaac Newton established the price of gold in 1717 and de facto put England on the gold standard.

Accepted Answer

Sir Isaac Newton served as the Master of the Royal Mint and established the price of gold in 1717, which helped to put England on the gold standard.

Question 3

As a result of Bretton Woods and the dollar's use as a proxy for gold, the United States ran up a balance-of-payments deficit of around $56 billion, which led to the United States going off the gold exchange standard in 1971.

Accepted Answer

This statement is true. The use of the US dollar as a proxy for gold under the Bretton Woods system meant that other countries could exchange their dollars for gold at a fixed rate. However, the US ran a large trade deficit, which led to an outflow of gold reserves. By 1971, the US was unable to maintain its obligations under the gold exchange standard and therefore went off the standard.

Question 4

The Bank for International Settlements operates as the banker for central banks.

Accepted Answer

The Bank for International Settlements (BIS) is often referred to as the "central banks' bank" as it provides banking services, financial stability, and cooperation among central banks and other international organizations. Therefore, the statement is true.

Question 5

The exchange rate for today for delivery within two days is known as the current rate.

Accepted Answer

The exchange rate for delivery within two days is known as the "spot rate," not the current rate. The current rate refers to the exchange rate at the present moment.

Question 6

If freely floating currencies are allowed to fluctuate against one another, at times the fluctuations might be quite large.

Accepted Answer

Freely floating currencies can be affected by various factors such as economic and political events, which can lead to large fluctuations in their values.

Question 7

A central reserve asset is a holding that has value that is held by private banks in case of a liquidity crisis.

Accepted Answer

A central reserve asset is typically held by central banks (not private banks) as part of their foreign exchange reserves to manage the country's currency exchange rate and ensure financial stability.

Question 8

The law of one price states that in an efficient market, like products will never have like prices.

Accepted Answer

The law of one price states that like products should have like prices in an efficient market. This means that the same product should have the same price in different locations or markets. If prices are different for the same product, there may be arbitrage opportunities available to exploit the price differences, which will ultimately lead to equalization of prices.

Question 9

The Bretton Woods system led to minimal growth in international trade but helped to reduce inflation levels.

Accepted Answer

The Bretton Woods system actually led to an increase in international trade due to the stability of exchange rates. However, it did help to reduce inflation levels by linking national currencies to the US dollar which was backed by gold.

Question 10

The international Fisher effect states that the interest rate differentials for any two currencies reflect the expected change in their exchange rates.

Accepted Answer

The international Fisher effect states that the interest rate differential between two currencies should be equal to the expected rate of change between the two currencies' exchange rates. Therefore, the statement is true.

Question 11

Currency exchange rate movements are well understood by economists and can be accurately forecast, which eliminates risk for the international seller operating with exposure outside the home currency.

Accepted Answer

Currency exchange rate movements are complex and affected by various economic, political and social factors making them difficult to accurately forecast. As a result, there is always a risk for international sellers operating with exposure outside their home currency.

Question 12

De Gaulle pushed Nixon to close the gold window at the Treasury, and this one action moved the IMF toward a floating exchange rate system.

Accepted Answer

It was President Nixon's decision, not influenced by De Gaulle, to close the gold window in 1971 that led to the shift towards a floating exchange rate system, as countries could no longer exchange dollars for gold, effectively ending the Bretton Woods system.

Question 13

One possible current currency arrangement is a fixed peg, whereby the exchange rate of a currency is allowed to move (within a narrow band) with another currency. One example is the pegging of the Canadian dollar to the U.S. dollar.

Accepted Answer

The Canadian dollar is not pegged to the U.S. dollar; it operates under a floating exchange rate system where its value is determined by the foreign exchange market.

Question 14

The complexity of the gold standard was a part of its appeal.

Accepted Answer

The gold standard was primarily valued for its simplicity and reliability in providing a fixed currency value based on a specific amount of gold, rather than its complexity.

Question 15

Global foreign currency exchange transactions total in the area of $4 trillion daily.

Accepted Answer

According to data from the Bank for International Settlements, global foreign currency exchange transactions average about $5.1 trillion per day.

Question 16

The controlling mechanism for a gold-based exchange system and a floating-rate system are the same.

Accepted Answer

The controlling mechanism for a gold-based exchange system involves the government fixing the value of its currency to a fixed amount of gold reserves, while a floating-rate system involves the value of the currency being determined by the demand and supply in the foreign exchange market. Therefore, the controlling mechanism for these two systems are different.

Question 17

The Fisher effect describes interest rate parity; it's the law of one price applied to interest rates. Interest rates vary to take into account anticipated differences in inflation levels.

Accepted Answer

The Fisher Effect indeed describes interest rate parity as the law of one price applied to interest rates to take into account anticipated differences in inflation levels.

Question 18

The Bretton Woods meeting in 1944 established a fixed-rate exchange system among Allied governments that was imposed on the Axis governments.

Accepted Answer

The Bretton Woods meeting established a fixed-rate exchange system among its member countries to stabilize post-war economies, but it was not specifically imposed on Axis governments nor was it limited to Allied governments. It aimed to regulate the international monetary system in general.

Question 19

Exchange rate forecasting is an advanced science; with the correct data, we can predict with accuracy exchange rate movements.

Accepted Answer

Exchange rate forecasting is a complex task that involves numerous variables and external factors. While there are tools and models available to assist analysts in making predictions, accurately forecasting exchange rate movements is still challenging, and there is always the potential for unexpected events or changes in economic conditions to disrupt projections. As a result, exchange rate forecasting is more of an art than a science, and even the most sophisticated models are not foolproof.

Question 20

Countries put limitations on the convertibility of their currencies when they are concerned that their foreign reserves could be depleted.

Accepted Answer

When countries limit the convertibility of their currencies, it is usually to prevent a depletion of their foreign reserves or to protect the value of their currency, among other reasons. This is done by placing restrictions on the amount and frequency of currency conversions that can be made by individuals and businesses.

Quiz 8: The International Monetary System and Financial Forces